Government’s Snake Oil Won’t Cure Jobs Ailment

May 10 (Bloomberg) -- Want to know what Federal Reserve
policy makers are thinking at any given time? Take a look at
what the research staff is doing.

Back in the early 1990s, the staff was busy trying to
explain the inexplicable weakness in M2, the Fed’s broad
monetary aggregate. Nowadays its efforts are focused on
unemployment.

Fed chief Ben Bernanke wants to understand why the
unemployment rate has fallen so much in the face of weak
economic growth, defying past relationships between the two
measures. His quest is pretty much confined to econometric
models.

The hawks on the policy committee are more interested in
the nature of today’s 8.1 percent unemployment: whether it’s
cyclical, a result of a deep recession and tepid recovery, or
structural, which implies impediments to suitable match-making
between employers and job seekers. For this group, the Bureau of
Labor Statistics’ monthly job openings and labor turnover
survey, or JOLTS, offers some real-world clues.

Job openings are one component of something called the
Beveridge Curve, which describes the relationship between
vacancies and unemployment. In an expanding economy, the
unemployment rate is low and the vacancy rate is high as job
openings go unfilled. The opposite is true during recessions.
The Beveridge Curve, in other words, is downward sloping.

Shifting Curve

Movements along the Beveridge Curve are normal during the
business cycle. What’s happening now is that the curve has
shifted outward, to the right, so that for any given level of
unemployment, there are more job openings.

Using the Conference Board’s Help-Wanted Advertising Index
as a proxy for job openings, economists at the Cleveland Fed
constructed a Beveridge Curve going back to the 1973-1975
recession. Their research suggests outward shifts following
contractions aren’t unusual.

The curve shift is much more pronounced this time. While
it’s too soon to draw any firm conclusions, there are
indications that today’s high unemployment reflects a mismatch
between jobs that are available and the skill set or location of
those eager to fill them.

And that has implications for policy makers. Operating
under the assumption that more stimulus will create more jobs,
the Fed reduced its benchmark interest rate to 0 to 0.25
percent, pledged to keep it there at least through the end of
2014 and engaged in multiple rounds of bond buying to lower
long-term interest rates. The Fed rationalized its stance, well
after the crisis and recession had passed, as necessary to
fulfill its full-employment mandate.

What if the Fed, through all its efforts, can’t buy more
employment? What if unemployment is structural, with an
inadequately trained workforce or labor immobility preventing
employers and job seekers from hooking up?

Signs are pointing in this direction. Long-term
unemployment hasn’t been this high for this long since World War
II, with 41.3 percent of the unemployed out of work for 27 weeks
or more in April. The longer Americans are out of work, the more
obsolete their skills.

Second, the U.S. is falling behind when it comes to
educating and training today’s students for the jobs of
tomorrow. Some Midwest manufacturing companies, faced with a
dearth of skilled candidates, are partnering with local
community colleges to train the high-tech machinists they so
badly need. Subsidizing tuition turns out to be more cost-effective than on-the-job training -- and something best
coordinated at a local level.

Third, some American workers, at least those not
constrained by language or other barriers, can’t relocate to a
better job market because they are burdened with a home they
can’t sell. Housing, which usually leads the business cycle, is
still in the process of bottoming.

Churning Galore

If you have never looked at the JOLTS or 12 years of
available data on labor turnover, you probably didn’t know that
50 million Americans found a job last year while 48.2 million
left a job or were fired. New hires represented 38.1 percent of
total employment last year. In 2005, the share was 47.2 percent.

Impressive, isn’t it? Yes, there’s some double, even
triple, counting in the JOLTS. A short-order cook who changes
jobs three times in one year is counted three times. Still, with
everyone hyperfocused on the small net change in employment in
any given month, it’s easy to forget just how flexible the U.S.
labor market really is.

Flexible, yes. Magical, no. It can’t turn a machine-tool
operator into a circuit-board designer overnight. And neither
can the Fed.

Structural unemployment, like the nation’s other
fundamental deficits, is a tough challenge for policy makers all
around. Jobs are a big issue in the presidential election. No
elected or appointed official wants to see the public suffer,
financially or emotionally, from being unemployed. There’s a
strong desire to do something even if nothing is the lesser of
two evils.

On the fiscal front, attempts to correct long-term
structural imbalances with short-term tax-and-spending policy
are doomed. Cyclical medicine leaves the patient with more debt
and the same old ailments.

What happens if the monetary authority misdiagnoses the
cause of high unemployment and uses its usual tool, the printing
press, as a cure? For the same money, the Fed will buy itself
more inflation and less growth. That’s the sort of jolt the
economy can do without.

(Caroline Baum, author of “Just What I Said,” is a
Bloomberg View columnist. The opinions expressed are her own.)